26 Mar 2009
Defence Procurement for the next 5 years - involving SMEs
Good afternoon [Minister(s)], Ladies and Gentlemen,
I am very grateful to NDI for the invitation to speak at this year's conference and for the opportunity to support the excellent work that NDI does in representing its members' interests, both within the wider industry and to government.
The theme of the conference is one that is relevant to us all, whether large or small, and the issues we shall be discussing - and I am not being overly dramatic when I say this - are critical to the future of the defence industry in the UK and its ability to support our armed forces in the future.
I've been asked to offer some industry perspectives on defence procurement over the next five years. Given the number of variables that apply, my crystal ball is decidedly cloudy but what I will try to do in the next 20 minutes or so is to give you my thoughts on some of the key issues that I think we - industry and government - need to tackle if we are to ensure jointly that those that protect us get the equipment and support they need, that the tax-payer gets value for money and that we in industry have viable businesses and the confidence to continue to invest for the future.
I will inevitably draw on a BAE Systems' perspective but I hope that you will identify with the propositions I shall make. Although BAE Systems is a large defence and security company - the largest in Europe, the fifth largest in the US and the third largest globally - I am personally very sensitive to the part that the smallest SMEs can play in BAE Systems' ability to perform at the prime contract level, in ensuring continuity of supply to our military customers and in contributing to sustaining a vibrant and successful defence supply chain in the UK.
I am also very conscious that over £4Bn or our company turnover is expressed through our businesses in the North, whether it is in land systems here in Newcastle, Submarines at Barrow or Military aircraft at Warton, Samlesbury, Woodford and Brough, and that all of our activity depends on suppliers clustered around our Northern sites.
Altogether we have over 9000 companies of all sizes in the BAE Systems' supply chain and their engineering and management skills, their innovation and their continued viability as businesses are essential to the future success of BAE Systems.
So what is the context we are all operating in?
The first and obvious contextual point is the pressure on the defence budget. The nature and extent of that pressure is widely recognised and has attracted much comment in Parliament and the media. The pressures are very real and they impose a significant burden on Ministers and officials in trying to reconcile the demands of current operations and the armed forces' longer term capability requirements and commitments with a level of resources that, notwithstanding statements about sustained growth is cash terms, is apparently out of balance and inherently hard to flex.
I don't intend to venture into a debate about what the size of the defence budget should be but, at a time when our armed forces are engaged in two demanding overseas operations at least one of which is likely to continue for a significant number of years to come, and we are embarking upon a number of major capital programmes for the future, it strikes me as odd that the percentage of GDP we allocate to defence is the lowest since before the Second World War.
The MOD is rightly looking at measures to ensure that the priority for resources goes to supporting those on operations and, through the recent Equipment Examination and the ongoing Planning Round, is evaluating the optimum use of available resources but I suggest the inescapable bottom-line is that the bottom line isn't big enough to deliver the currently planned programme.
This dilemma is likely to be compounded by the measures the government will no doubt need to take to adjust public spending in response to the financial crisis. It would be nave to think that defence will escape such measures. At best, they are likely to make it even more difficult to achieve a balanced and affordable defence equipment programme.
Meanwhile [as Andrew has mentioned] the search goes on within the MOD for improved efficiency in the management of the acquisition process. Most recently the review that Bernard Gray has been commissioned to do by the Secretary of State will hopefully help to further inform the way the MOD can best manage its processes and procedures. In carrying out that review we must hope that Bernard Gray will recognise the really beneficial work that has been done over the last few years building on the foundations of the Defence Industrial Strategy and the Equipment Acquisition Change Programme.
And, in this regard, I should acknowledge the importance of the bringing together of the Defence Procurement Agency and the Defence Logistics Organisation into Andrew's Defence Equipment & Support organisation. This was an essential step to achieving a truly through-life approach to acquisition and, not just because [the Minister and] Andrew Tyler is here, I want to pay tribute to the Department and, in particular, to Sir Kevin O'Donoghue and his senior team, for the way in the DPA and the DLO were successfully brought together and now embody a more holistic approach to acquisition.
Another dimension for the future that I expect to become increasingly evident over the next few years is the increased focus being given to the adjacent security market. Defence and security are becoming inextricably linked and we in industry need to factor that in our future plans.
The elephant in the room is, of course, the strong probability of a Defence Review after the next General Election. Irrespective of which Party forms the next Government, there is widespread expectation that there will be a fundamental re-evaluation of the balance between defence commitments and resources.
There is a strong argument that the only way to achieve a workable balance between defence commitments and resources is to revisit the baseline assumptions about the UK's foreign policy and national interests and allocate resources on the basis of that analysis.
But a redefined defence strategy would need to be fully aligned with an adequate long-term budget commitment. Anything else is a recipe for continuous pressure to make compromises and sub-optimal decisions. In the long term this would be corrosive and would run counter to the need for a strong UK defence engineering and manufacturing and supply base.
We also have to recognise that the outcome from a potential defence review in the next 2-3 years could be measures to adjust commitments in line with currently planned levels of defence expenditure rather than the reverse. That would raise questions for us all to consider about the size and shape of the businesses that we believe would be viable in those circumstances - with all that means for investment, employment and our supply chains.
In my view, the sooner these decisions are faced the better and we would all like to do this on the basis of a coherent, affordable and transparent National defence programme.
So it seems to me that the context for defence procurement in the next 5 years is, in summary, continuing pressure on the defence budget for perhaps the next 3 years followed by a defence review; continuing attempts to find ways to improve defence acquisition in order to save money; in an evolving defence and security market place.
Many of you might think - Not much new there then!
But, in these circumstances, we in industry need to be positive and engage with the MOD and wider Government to take us though this difficult period and come out the other side with a business climate in the defence and security sector that meets the aspirations of all stakeholders. I've mentioned already that a lot of good work has been done on the back of the Defence Industrial Strategy and the Defence Acquisition Change programme.
For me, part of the answer to dealing with the transformation that has to happen over the next 5 years, is to build on some of the themes and changes that came out of these two reports. I'd like to touch briefly on a few aspects.
First, the Defence Industrial Strategy recognised that, while competition rightly remains an important cornerstone of MOD procurement policy, the complex and leading-edge technological nature of many of the programmes that now contribute to delivering battle-winning military capability require the ability, both in the MOD and in industry, to find and successfully operate alternative acquisition approaches.
One such model envisaged the use, where appropriate, of 'partnering' between customer and supplier to provide a long-term and mutually beneficial business relationship. I strongly believe that this approach can and does work as we have seen with experience with the ATTAC programme for Tornado Support.
In the climate in which the MOD currently has to operate - both operationally and financially - it is understandable that short-term pressures are having a heavy influence on decision making.. But the longer-term interests of the MOD and the armed forces, as well as those of the industry that supports them, need a longer-term horizon. I would therefore urge that the dialogue with industry on a framework for adopting partnering approaches where appropriate should be re-invigorated.
My second point concerns Through Life Capability Management. TLCM has given us a new conceptual framework to tackle not only what is involved in the through life management and support of platforms, equipment and systems but also how to approach the provision of capability improvements and upgrades as an integral part of that through life management process. Most of us are comfortable with Through Life Management and are already practicing appropriate business approaches and processes. On TLCM, the challenge - for industry and the MOD - is to offer the inclusion of 'Capability' in a manner that is affordable and can be embodied in the product with minimum disruption to front line fleet availability.
Linked to this is the new architecture of MOD programme boards that is being put into place and all that that will mean for the MOD's internal processes. It is in our interest as well that the Programme Boards are effective and my plea would be that, to the extent that is possible, there is the opportunity for dialogue with industry to inform the Boards' decision making.
Indeed, I believe it is imperative, if industry is to be able to play a full part in working with the Department and the armed forces to meet the challenges presented by the current operational tempo and the constraints on the defence budget, that we find a way to engage more constructively together. That requires mechanisms but above all a willingness to share information.
My third point is of direct relevance to this conference - the importance of the supply chain and the potential that exists within it - especially among SMEs - to partner for innovation and improved efficiency.
The DIS shone a spotlight on the importance to the MOD and to larger companies such as BAE Systems of having a viable, efficient and successful network of companies of all sizes able to offer competitive and innovative products and services. I think that industry and the MOD have made progress in this area. We, and I'm sure many of the other prime and higher-tier companies, have done a lot of work to get better visibility and understanding of our suppliers, capabilities and, indeed, vulnerabilities.
This latter point has become even more important as the recession may hit hard on some SMEs and I can assure you that we in BAE Systems are very alert to the pressures on the SME community and the potential that that creates for weakness in our own supply network and our ability to meet our commitments to our customers in the UK, and in the export market.
The Supply Chain in the 21st Century (SC21) initiative continues to gain momentum and 430 companies have now signed up to it. Within BAE Systems we are working closely with other primes to embed sustained improvements in performance and relationships with our supply networks. We are also working with the Regional Trade Associations and Development Agencies to support SMEs in understanding and implementing SC21. We think it is an important initiative and I'd commend it to those of you who are not yet signatories.
Finally, the DIS acknowledged the need to understand and define what the UK requires by way of the capabilities and technologies in both government and industry in order to be able to sustain the required level of 'operational sovereignty'. DIS gave an initial insight into the MOD's evolving thinking on the capabilities that are considered essential to sustain the required level of operational sovereignty.
There is much still to be done in this area. In particular there remains a need for more clarity for both MOD officials and industry about the capability areas that are regarded as key to the UK's operational sovereignty and, therefore, what strategies and investment are needed to sustain and develop them.
The term 'affordable sovereignty' has been coined to describe the reality of the MOD's limited freedom to make decisions based on operational need. While we indeed have to be realistic about what level of operational sovereignty the UK can aspire to, there must surely be benefit in having an informed debate about the art (and cost) of the possible.
So, if these are some of the challenges, what part does Industry play in addressing them?
I am concerned that during this time of economic turmoil that there are strong differences of opinion about the apparent value of both engineering and manufacturing to the economy. From my perspective, a commitment to a major capital defence programme which engages and develops the Nation's highly skilled workforce, maintaining our competitiveness and further developing our national ability to compete in world markets can only be a good thing.
A pound spent on a UK-based defence programme will flow into the UK economy, especially in the regions it must be said, through the teams at prime level and into the supply chain. In many cases supplier companies in the defence sector are under considerable pressure because of the impact of downturn or lack of confidence in automotive and commercial aerospace activity. So spend in Defence has the potential to bolster and protect such suppliers so that they are able to survive this period of difficulty.
The skills that are developed in the Defence and security sector are those that will be required for the UK to be able to compete on a world stage for the decades to come. We will not compete on the same terms as the low cost economies. We should acknowledge that our National offering should be in the high value-add proposition. I would argue that this requires exceptional skills and levels of attainment in academia, research and development, the creation of products and services and the skills to bring these to market.
I believe that the defence industry community offers the most developed and trusted example of this in the UK today. This is worthy of consideration by Government when deciding its future growth plans and how to reinvigorate the economy. After the period of recession and growing unemployment, the measure of our success will be in the growth rate of high value add jobs, not just how many people the Nation gets back into employment. Defence Companies in the UK can offer a platform from which to build a significant part of the UK's future prosperity. The approach we take to apprenticeships, graduate training, up-skilling our workforce throughout their working lives and pushing the boundaries of technology are all going to be key to the model for the UK's future success - not just in defence but I would argue, in other vital markets as well.
There is a real need for UK industry to respond to this challenging environment. We can not sit back and watch the Government team contend with this situation without an appropriate response from industry. So, what should that look like?
We must, I strongly believe, all adopt an 'Enterprise level' mindset - that is to see and understand how to respond and contribute to a bigger picture. This will ultimately mean a willingness to form partnerships across the supply network, and adopt new constructs and new approaches. There are recent examples of new relationships between suppliers which would have been highly unusual or unacceptable in the preceding years.
We must continue to take cost out of our businesses - minimising overhead and minimising cost for a given output. We have already seen significant increases in efficiency with the initial introduction of the automotive industry approaches such as 'lean' and focus on waste elimination. We must also rise to the challenge of sustainable procurement throughout the supply network.
For new projects or increments to existing capability we must be able to inform trade-off studies giving impartial advice when called to do so. Our conversations should be ones about the art of the possible rather than ones built on aspiration. This in turn will help to improve everyone's reputation for on cost and on time delivery.
It is clear that with an evolving threat and with uncertainty about future budgets there is a need to bring defence and security capability to market in shorter timescales. We will have to address new requirements in months not in years.
This in turn puts emphasis on thoughtful and informed plans to insert candidate new technologies in existing and future products.
It is also clear that the UK will put emphasis on shorter production runs and the flexibility to produce according to both military need and available MOD budget profile. This will mean that we will all have to address the inherent flexibility in our production readiness - a huge challenge given the scale of infrastructure investment required for most defence programmes.
Where it is possible for the MOD team to provide greater certainty about its future requirements, Industry can be expected to make the case for shareholder investments in the defence technology and Industrial infrastructure.
It seems to me that there is an art to creating an atmosphere of certainty around our major programmes. I note that those who run the US programmes that I am involved in act together to dispel doubt about the future of the programmes. This seems to create a much healthier outlook for those who would invest. We can all play a part in establishing an objective view of our future UK national programmes and not take our eye off the bigger enterprise picture. It is in everyone's interest to have successful programmes that attract investment and deliver outstanding military capability. We all have a duty therefore to be objective in our commentary about our UK national major projects.
My final and key message is that industry is willing to be part of the solution to the challenges that the armed forces and the MOD are facing. We are equipped for this discussion. To [the Minister, to] Andrew, to the Secretary of State - please involve us in finding solutions to meet the current and future challenges. Industry clearly has a vested interest in the success of the defence enterprise and we are passionate about its future success.
Thank you.
